Banking Sector May Recover Very Marginally From Low Base: S&P

Country's banking sector is likely to recover very marginally over next few quarters due to low capacity utilisation in corporate segment and wait and watch approach of borrowers in some sectors, says a report.

"We expect the country's banking industry's growth and profitability to gradually improve in financial year 2017-18, from the low base of the financial year 2016-17," S&P Global Ratings's credit analyst Amit Pandey said in a note on Tuesday (February 28).

"However, the improvement will be sluggish at best, given low capacity utilisation in the corporate segment and the wait-and-watch approach of borrowers in some retail segments post demonetisation," he said.

The rating agency said the pace of new non-performing loan creation is likely to abate somewhat over next 12 months.

"But banks with sizable corporate exposures will remain vulnerable, given their low provision coverage and inadequate resolution of stressed assets," Pandey said.

According to the agency, weak profitability and rising capital demands from basel III implementation will continue to put pressure on the capitalisation of some public sector banks in the country.

These banks, so far, have been able to meet minimum regulatory requirements largely because of the government's capital infusions, their issuance of additional tier 1 capital, and lower growth in risk-weighted assets.

"Barring further large capital infusions from the government, credit profiles of some of the public sector banks we rate in the country will remain vulnerable," Pandey said.

The rating agency said past few years have been tough for the banking industry with anaemic nominal GDP growth and a down cycle in the infrastructure and metal sectors.

Demonetisation resulted in the lowest loan growth in several years and high stress on profitability and asset quality, it said.

It expects loan growth in the country's banking sector to recover in the financial year 2017-18.

A likely increase in nominal GDP growth and higher commodity prices will lead to greater working capital requirements for firms, Pandey said.

In addition, demand in the retail, small business, and agriculture segments will normalise gradually from the lows following demonetisation which will support loan growth, he said.